Secured Cards Turn A Deposit Into A Limit

A secured card works like an ordinary card at the point of sale while resting on a deposit held by the issuer. That deposit changes the economics of the account rather than its mechanics.

The deposit is collateral, not prepayment

Money lodged with the issuer is held as security against the balance. It is not spent down as the card is used, and purchases still create a debt that must be repaid.

The limit is generally set at or near the deposit, so the issuer's exposure is largely covered if the account is never repaid.

Because the risk is collateralised, applications can be approved where an unsecured card would not be, including files with adverse history or almost no history at all.

Cost does not disappear with the risk

The security reduces credit risk but not servicing cost, so these products often carry annual fees and interest rates at the higher end of the market.

Interest is charged on balances carried in the ordinary way, and the deposit does not offset it. Paying the statement in full remains the way to avoid interest.

Where a deposit earns nothing while the account charges interest, the arrangement costs money in both directions, which is worth reading before the account is opened.

Reporting is what makes the product useful

The point of a secured card, where it has one, is that the issuer reports the account as ordinary revolving credit rather than as a secured facility.

That is not universal. Some issuers report differently or not at all, and the value of the product depends entirely on whether the payment history reaches the agencies.

Confirming which agencies receive the data, before opening, distinguishes an account that builds a record from one that simply costs money.

Utilisation behaves harshly on a small limit

A limit tied to a modest deposit means small balances occupy a large proportion of it, and the proportion in use is a common scoring characteristic.

A single ordinary purchase can therefore report as heavy usage, which is the opposite of what the holder intended when opening the account.

Clearing the balance before the reporting date, where the cycle is known, is the mechanical answer, though the reporting date is not always the same as the payment date.

Getting the deposit back is a defined process

The deposit is returned when the account is closed and settled, or when the issuer converts the account to an unsecured product after a period of satisfactory operation.

Conversion is at the issuer's discretion and depends on its own criteria, so it should be treated as a possibility rather than as a scheduled outcome.

Availability of secured cards, the protection given to deposits and the rules on their return differ substantially between markets, and in some there is no equivalent product.